Essentials of Risk Management: The Five Crucial Steps in the Risk Management Process
“Risk” is a scary word. It insinuates injury, danger, or peril. To ease your mind when approaching risk, you should be aware of the Essentials of Risk Management (ERM). ERM breaks down the risk management process into simple, easy to follow steps and techniques to help control and mitigate risk.
The Risk Management Process:
- Identify the risk – What is the risk? What is the agency’s history with the risk?
- Examine the risk – How does the risk affect the entire organization?
- Select the risk control technique – Identify potential risk control techniques.
- Implement the technique – Implement the chosen technique(s).
- Monitor the results – Monitor effectiveness and recycle the process.
The key to this process is that it’s a continuous process.
There are different types of loss control techniques focused on reducing risk in different ways. The most effective form of loss control is risk avoidance; this is when management decides to intentionally forgo an activity to avoid the perceived risk associated with the task or process. An example of risk avoidance would be removing an old, damaged playground from your property. As the old playground poses a risk, removing it would eliminate the potential for a liability loss.
Loss Prevention – Loss prevention focuses on reducing the probability (frequency) of the loss from occurring, it does not completely prevent the loss from happening. Hosting a resident safety orientation and offering fire safety training is a form of loss prevention. The risk of having a cooking fire lessens once residents are trained on the dangers of cooking fires and prevention tactics to use while cooking.
Loss Reduction – Loss reduction aims to reduce the severity of a loss once it occurs. Reducing the severity of the risk reduces the cost associated with the loss. A perfect example of the loss reduction strategy is the use of sprinkler systems. Although a sprinkler system would not stop a fire from happening, it would reduce damages tremendously.
Loss Separation – Essentially loss separation is a technique that spreads your assets throughout the organization to protect your agency from a sustaining a total loss. By separating or duplicating assets throughout the organization, an agency can prevent a single event from causing a total loss. For example, if an agency stores all of their company vehicles at a single location, should something happen to the garage (fire), they would lose their complete vehicle inventory. This is why it’s important to spread assets throughout the organization instead of condensing into a single location.
Loss Transfer – Loss transfer displaces the liability (or a portion) of the loss to another party. For example, an agency may subcontract with a roofing company to repair a leaking roof. Within that contract it is essential to transfer all risk specific to that job over to the subcontractor, this is typically done through hold-harmless agreements.
Although these risk control techniques do not fully eliminate risk, a combination of the different techniques has been proven to reduce risk effectively. You are now ready to reduce risk in your agency.
HAI Group provides risk consulting services to our members to help in reducing these risks. To learn about the services HAI Group offers and connect with a consultant click here.